Automotive Chip Makers Take a Hit on Trade and Tariffs

Shares of chip makers that supply parts to automobiles were hit yesterday after an auto-parts supplier cut its revenue outlook.

That’s just part of the climate of tariff and trade talk, and Morgan Stanley analysts Craig Hettenbach and Joseph Moore urge investors not to get to carried away with the notion the suppliers will be devastated.

The news event yesterday was Munich-based Osram Light AG (OSR), a “tier 2” maker of auto parts, which cut its outlook for revenue growth this year to a range of 1% to 3%, from a prior range of 3% to 5%, acting “restrictions on trade and sales as well as planning risks affecting automotive manufacturers” that have “created noticeable uncertainty."

Weighing in on the matter, Hettenbach and Moore write that the fall in shares of chip suppliers after Osram’s disclosure “cloud prove to be an overreaction.

Among the companies that serve the auto market, some of the most prominent are TE Connectivity (TEL), Cypress Semiconductor (CY), On Semiconductor (ON), and NXP Semiconductor (NXPI), which is in the process of trying to be bought by Qualcomm (QCOM).

The stocks took a step down yesterday on the news, and remained under pressure today.

The authors note that some of Osram’s troubles may be self-inflicted:

Osram had previously admitted to market share loss in autos during its last earnings call in May, so there could be some company-specific issues at play here as well. Furthermore, Hella KGaA Hueck & Co, a tier 1 automotive supplier and customer of Osram, issued a statement yesterday in response to Osram's lowered outlook commenting that it has not seen any indication of weakness in its automotive business.

They note that TE Connectivity, NXP, Cypress, On Semi and STMicroelectronics (STM) have the broadest exposure to the automotive market.

The analysts recommend hanging on to TE Connectivity, whose shares they rate at Overweight with a $117 price target.

"Importantly, estimates for TE Connectivity are already well below seasonal for the June quarter, implying a low bar.

"Furthermore, we expect contribution from new automotive sensor ramps in 2H and the company's momentum in delivering increased $ content remains strong."

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